Template:M summ GMRA Equivalent

“Equivalent” isn’t just “similar”

You may come across someone (in OTC Clearing/CCP space) who wants to modify “equivalent” to mean not just fungible securities of the same Series/ISIN, but “similar ones” – same issuer, but different maturity, and under a different ISIN etc.

Resist this. It is likely to have arisen by way of misapprehension. In most master docs, “equivalent” is carefully defined to be exactly fungible but at the gallop at which most collateral operations managers’ working days pass, they may have missed this, labouring instead under the illusion (based on its ordinary dictionary meaning) that “equivalent” allows redelivery of non-fungible securities of a “similar” type. They may even defend their misapprehension. “Yeah, they may protest, “but what if there’s some illiquidity in the market?”

But — well, you have that exact risk across your entire ISDA collateral book, so it’s a bit late. In practice, if there is a market disruption and you can’t get hold of the necessary collateral, as long as it doesn’t coincide with your own credit deterioration, you should be able to hash it out.

And if you are worried about it, go for a cash-only CSA — these days most are — or don’t allow potentially illiquid assets as collateral, or just don’t reuse that asset.

Now there may be a need for the “similar securities” concept in the OTC to CCP space that we haven’t yet divined, doubtful, but let’s say — but we should call that something else – perhaps “Similar Credit Support” – to differentiate it from “Equivalent Credit Support” which is still needed in the CSA to support the title transfer analysis.